Back Mountain Industries (BMI) has two divisions East and West. BMI has a cost o

Question

Back Mountain Industries (BMI) has two divisions East and West. BMI has a cost of capital of 15 percent. Selected financial information (in thousands of dollars) for the first year of business follows Sales revenue Income Investment (beginning of year Current liabilities (beginning of year) R&D; expenditures East West $2,800 $6,800 660 1,550 2,050 290 950 850 515 290 R&D; is assumed to benefit two periods All R&D; is spent at the beginning of the year Required: a-1. Evaluate the performance of the two divisions assuming BMI uses economic value added (Enter answers in thousands of dollars. Round your answers to 1 deci East West

Explanation / Answer

Answer

residual income = operating income - ( % cost of capital * average operating assets )

residual income for east division

= 515 - ( 15 % * 1550 )

= 515 - 232.5

= 282.5

residual income for west division

= 660 - ( 15% * 2050 )

= 660 - 307.5

= 352.5

divison ENA East 282.5 West 352.5

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